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Financial Ratios

Quick Bookkeeping Insights > Additional Advanced Topics > Financial Ratios

Financial Ratios are calculations used to analyze a company's financial performance and assess its financial health. They provide insights into various aspects of a company's operations, profitability, liquidity, solvency, and efficiency. Financial ratios are calculated using information from a company's financial statements, such as the balance sheet, income statement, and cash flow statement. In other words, financial ratios are measurements used to determine how healthy a business is.
There are several categories of financial ratios, including:
  1. Profitability Ratios: These ratios measure a company's ability to generate profits and earn a return on its investments. Examples include gross profit margin, net profit margin, return on assets, and return on equity.
  2. Liquidity Ratios: These ratios assess a company's ability to meet its short-term obligations and manage its cash flow. Examples include the current ratio, quick ratio, and cash ratio.
  3. Solvency Ratios: These ratios evaluate a company's long-term financial stability and its ability to meet its long-term obligations. Examples include the debt-to-equity ratio, debt ratio, and interest coverage ratio.
  4. Efficiency Ratios: These ratios measure a company's operational efficiency and how effectively it uses its resources. Examples include inventory turnover ratio, accounts receivable turnover ratio, and asset turnover ratio.
  5. Market Ratios: These ratios reflect the market's perception of a company's value and its attractiveness to investors. Examples include price-to-earnings ratio, price-to-sales ratio, and market-to-book ratio.

Each financial ratio provides valuable information about a company's financial performance and position. By analyzing these ratios over time and comparing them to industry benchmarks or competitors, investors, analysts, and stakeholders can gain insights to make informed decisions and assess the company's creditworthiness, profitability, and overall financial health.

To learn more about financial ratios check out my Financial Statements Analysis Tutorial

Financial Statements Analysis & Ratios Videos
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